Defining “Knowledge” to Include What Someone Should Have Known

Starting at 13.364, MSCD considers the elements that go into a definition of the defined term Knowledge.

One element that discussion doesn’t include is the possibility of Knowledge being defined to include information that the person in question should have known. That’s knows as “constructive knowledge,” and it features in the following definitions exhumed from the potter’s field EDGAR.

“Knowledge” means, with respect to an individual, such individual actually knows or should have known of the particular fact, matter, circumstance or other item.

“Knowledge” means the actual or constructive (knew or should have known given his or her position within the Group) knowledge of the relevant Person, which in the case of the Company or any of its Subsidiaries, means the Knowledge of Senior Management;

Knowledge” means, with respect to the Company, the actual knowledge of Michael Davidovich or Steve Slavutskiy and what either of them should have known in his Ordinary Course of Business.

“Knowledge” means, (i) with respect to an individual, the actual knowledge of such individual and what such individual should have known serving in the capacity in which such individual serves following reasonable inquiry; and (ii) with respect to a Person other than an individual, the actual knowledge of any individual who is then serving as a member, manager, or officer (or similar executive) of such Person and what any such individual should have known serving in such position following reasonable inquiry;

“Knowledge of the Company” and “Company’s Knowledge” means the actual knowledge of Karl Leaverton, Dave Taylor, Mike Newhouse or Jon Labonite and what any such individual should have known after a reasonable investigation.

“Knowledge” means, (a) with respect to an individual, the actual knowledge of such individual and what such individual should have known after a reasonable investigation; and (b) with respect to a Person other than an individual, the actual knowledge of J. Stephen Cornwell, Richard D. Perrin, David V. Pesce, Christopher J. Raymond, Nicholas M. Ilacqua and any individual who is serving as a director or officer of such Person and what any such individual should have known after a reasonable investigation.

The last three definitions refer to what the person should have known after reasonable investigation/inquiry; the first three do not. I’m not sure that makes a difference. Presumably, should have known refers to what a reasonable person would have known in the circumstances. It’s unlikely that a reasonable person would have been satisfied with sticking their head in the sand and not conducting a reasonable investigation. It follows that omission of any mention of reasonable investigation should be irrelevant.

But one might as well be explicit. That being the case, I don’t think the last three definitions are clear as to the role of investigation. What if there was no investigation? I’d refer to what that person should have known, including what that person would have found out in an investigation, regardless of whether an investigation was conducted, if the circumstances were such that a reasonable person would have conducted an investigation.

Instead of should have known, you could use the phrase constructive knowledge in the definition:

“Knowledge” means, with respect to a Party, the actual or constructive knowledge of such Party, after due inquiry. When used with respect to Seller, Knowledge shall include only the Knowledge of LaPlante and Wirth.

But that’s a bad idea: the less jargon, the better.

I’d be interested to know how broadly constructive knowledge is used in the market. Perhaps that’s something the ABA Deal Points Studies have looked into. (I haven’t checked.) Having to show actual knowledge is a demanding standard. Just having to show that someone should have known would seem as relaxed as an actual-knowledge standard is demanding.

[Update: @AMK351 tells me, in this tweet, that according to the 2014 ABA Deal Points Study, three-quarters of the contracts in the study sample used a constructive-knowledge standard.]

What’s your experience? Do you know of any relevant commentary?


About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

11 thoughts on “Defining “Knowledge” to Include What Someone Should Have Known”

  1. There is plenty of English case law about knowledge warranties and the duty to make enquiries. If I am acting for a warrantor and seeking to limit to actual knowledge, I use a formula such as “as far as X is aware, but without having conducted any searches or investigations.” This is particularly important in an area such as IP, where an ill-defined duty to make investigations could lead one down the long and expensive road of freedom-to-operate searches or inspection of worldwide IP registers.

    I am troubled by your last 3 examples, which seem to conflate two scenarios
    (a) what X should know but doesn’t
    (b) what X would know if he were diligent.
    I am suggesting the 3 examples should use the word “would” rather than “should”.

    • Mark:

      What is the difference between (a) and (b)? To anyone steeped in American negligence law, “should know” is pretty much the same things as “would have known, if he was reasonable,” which is pretty close to diligent.


      • Chris, it is more of a semantic or drafting point. The warranty should capture information that, after reasonable investigation, the warrantor then does know. The examples above suggest that the warranty also applies to information that, after reasonable investigation, the warrantor still may not actually know, but ought to know. This doesn’t sound right to me. If I don’t actually know it after investigating, I shouldn’t be in breach of warranty.

      • As between ‘should’ and ‘would’, I’d rather deal in conditional fact (what the individual would have known if something — inspection? inquiry? — had occurred) than in duty (what the individual should have known = had a duty to know).

  2. “Should have known” can also appear as “understand” as in the following example from a proposed software agreement.

    [Software Company] and Subscriber each may provide the other information which it treats as confidential or proprietary and which either (a) it has marked “Confidential” or “Proprietary,” or (b) a reasonable person in the circumstances would understand to be confidential or proprietary (“Proprietary Material”).

    For the final version, I eliminated the uncertainty and all of subclause (b).

  3. I would rather like to discuss if the ‘Knowledge’ Clause really make sense from ‘Fair Deal’ perspective. Both Buyer and Seller have agreed upon a purchase Price based on their common understanding on the Target. Such understanding is mainly based on Data Room and disclosure of the Seller. In case of any damage occured against These facts and information already disclosed after Closing, Seller usually does not take any responsibility, through certain provisions that every M&A Contract has. The Warrants and Prensents only cover the Facts beyond the DR and Fair Disclosure. Based on the defaulted understanding that ‘such Facts are Truth’ , the Seller and Buyer made the Price agreed. However, in case such Facts turned out not to be the Truth, and damages occured with the Buyer after Closing, Price shall be respectively reduced — does not matter if it is Seller’s Knowledge at the time if Signing or not. Therefore the Limitation on Warrants by ‘Knowledge’ Clause is questionable, does not matter if ‘should’, ‘would’ or ‘after reasonable investigation’.


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